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How double indexation can help in reducing your tax?

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Indexation term is associated with capital gain taxes. Double indexation is nothing but taking the indexation benefit of 2 financial years in one go. In simple terms indexation means adjusting the cost of capital asset (like Mutual funds) with inflation index numbers as per the Cost Inflation index figures announced every financial year. The Indian income tax law has allowed capital Assets to be indexed for calculating long term capital gain tax. Your period of holding of capital assets decides the long and short term status of your investments. For e.g. Physical gold and Real estate gets the long term status when the period of holding of asset is more than 3 years (36 Months), whereas financial capital assets like Mutual funds, shares, bonds becomes long term after the holding period of more than 1 year ( 12 months).

Indexation is something which is related specifically to financial year (April- March). If an asset is sold after completing the tenure required to gain Long term status as mentioned above, then to calculate the indexed cost of investment, the completion of different financial years also taken into account. Let’s understand this concept with an example.

 

Date of Investment in debt mutual fund: 1/1/2012 (FY 2012-13)

Completion of one year (12 months): 31/12/2012

If the investor sell out the above mentioned investment after 31/12/2012 and before 1/4/2013, then he can take advantage of indexation , but if he sell out after 1/4/2013 then he can enjoy double indexation benefit as investment holding has now entered in next financial year ( FY 2013-14).

 

Lets have a detailed example:

 

Mr A has invested Rs 100000 in a Fixed maturity Plan on 1/1/2012, which will mature on 15/4/2013 with an expected return of 9% p.a. Now technically the holding period is 1 year 3months and 14 days, but as the holding has crossed 2 financial year, so investment will be indexed 2 times and thus double indexation will be applied here.

 

Cost (Rs) – Rs 1,00,000 (1/1/2012)

CII (Cost Inflation figure) FY 2011-12 – 785

CII (Cost Inflation figure) FY 2013-14 –939

Indexed cost of investment would be : Rs 1,19,617 ( Rs 1,00,000/785*(939))

 

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